Financial freedom can be liberating. Knowing there is stability and enough saved up for the future is the ultimate goal of life. A budget is a surefire way to achieve financial balance in our lives.
With a budget, you can track your expenses and control your spending habits. Keeping your expenses under control allows you to plan ahead. Early on, it’s important to establish a habit of managing money.
Everyone has a financial goal, be it buying a car or sending your child off to college, and that is where a fixed budget comes in handy.
Spending less in one area can help you save money for investments, larger purchases, or even create a fund. By having a monthly budget written down, you will save time and organize your life.
To create an ideal budget, follow these steps.
Table of Contents
1. Select a Budgeting Template
Find a template that works for you. There is no one-size-fits-all approach to create a budget, so play around and see which way is most suited for you. The three common methods of budgeting are:
- Using a pen and paper
- Making a spreadsheet with all your entries
- Using budgeting apps or websites
2. Collect all financial paperwork
Before getting started, gather up all financial paperwork and bills. The more information you have, the better. Organize these well and start listing them out. These will include:
- Bank statements
- Utility bills
- Credit card bills
- Receipts from purchases (up to last three months)
- Investment statements
- Loan statements
3. Calculate your net income
Properly determine how much money you are making every month. Then, deduct taxes and other fixed allocations from that sum in order to get your net income.
If you’re someone with an irregular source of income, like a freelancer or an influencer, it can be tricky to estimate your net income.
A simple hack for such cases is to account for your lowest-earning month and base that amount on your fixed income. Change it up if you feel like you’ve had more money coming in recently.
4. List all your expenses
Write down all your monthly expenses. Use information from the last three months at your disposal. The list could include:
- Mortgage payments or rent
- Car payments
- Insurance
- Groceries
- Utilities
- Entertainment
- Student loans
- Childcare
- Transport costs
5. Categorize your expenses
The next step is a crucial one. After listing out all your expenses, divide them up into two categories:
- Fixed Expenses
- Variable Expenses
Fixed expenses are the ones that need to be paid, no matter what. You might have to pay the same amount for these almost every month. Rent, car payments, school fees for your children as well as utilities fall into this category. Some people allocate fixed savings or an amount for funds (e.g., college funds) every month. These will also fall under the fixed expenses category.
Variable expenses are the ones that change every month. Groceries, entertainment, gasoline, gift items, or retail shopping are included in these. It is possible to regulate and cut back your spending when it comes to your variable expenses. Having a mindful attitude towards such expenses makes all the difference!
6. Assign a spending value for each category
After sorting out the expenses, the next thing to do is to assign a strict spending value for each category. Adjust this sum according to the needs of that particular month. For little extra savings, limiting your variable expenses makes sense.
Very often, we splurge our hard-earned money on unnecessary purchases. Or we unknowingly spend extra bucks on things that we ‘want’ but don’t necessarily ‘need.’ Buying groceries is a need for every household. But that monthly gym membership (when you cannot make time for the gym) is most definitely a want.
7. Set your financial goals
Most of us have some idea as to what our future financial aspirations are and using an investment calculator can be very helpful. To realize these goals, it is essential to stick to a budget. After documenting your income and expenditure, you will be able to evaluate the spending and see if you can tweak it so that you have enough money to put forward towards your goals.
Adjust your habits accordingly. If you find that even after cutting back on your variable expenses, the numbers quite don’t add up, maybe look at adjusting your fixed expenses. It is pretty challenging to do this, and it takes a lot of discipline, so be sure to carefully weigh your options.
8. Budgeting hacks
To create a budget is one thing, but sticking to it is another. If you are used to a particular type of lifestyle, financially restricting yourself can be super difficult. Not to mention you might make mistakes or have misconceptions about using a budget — it takes work, and patience, to commit. Give yourself time to properly get used to it.
Here are five tips to give you an extra push and help you stick to a budget:
#1 The 50-30-20 Rule
This isn’t much of a hack, rather a simple plan that can be the framework of your budget.
Basically, you must allot around 50% of your after-tax income to your needs (read: Fixed expenses). These are things that you are obligated to do.
Around 20% of your income should be saved up or used for debt repayment. And the rest, 30%, goes for things that you might want.
You can use this template to manage your income, as I mentioned earlier. That being said, don’t be disappointed if the math doesn’t go in your favor. Life is meant to be enjoyed, after all, and good budgeting skills can go a long way.
#2 Cash Envelope method
Another brilliant hack to track the money in your budget categories is putting the Cash Envelope method in use. Keep your cash tucked away in envelopes for things that tend to bust your budget. This way, you’re less likely to overspend in certain areas, and it holds you accountable. After you get your paycheck, different label envelopes as ‘groceries,’ ‘gas,’ ‘personal,’ etc., and put away that money in your envelopes. A favorite among budget makers, this method is a tangible way to keep your money in check.
#3 Budgeting app
Budgeting software is a great way to track your spending, categorize expenses and connect with your financial accounts. It monitors your transactions and alerts you if you go over your budget — basically does all the work for you. Some of the best apps include PocketGuard, Mint, YNAB, and GoodBudget.
#4 Cut your utility bills
Cutting down on your monthly bills will be helpful if you’re tight on your budget. Be mindful of your electricity use whenever possible. Change your internet provider to save up some extra bucks.
#5 Save on food
Many of us have a severe spending problem when it comes to food (or shopping!). Getting coffee can be a costly affair and fast food adds up pretty quickly. The best way to go about it is to simply cook your own food. Not only does it save you money, but it is also so much healthier for you. If cooking for yourself is impossible, try out a menu planning service or tiffin service.
Over to you…
To create an ideal budget should not be a burden, rather a tool for assisting you in your financial journey. You can’t predict what the future holds, and you may have to lose in order to gain. Cut yourself slack and sit down every month with a clear mindset to work out your current goals. Spend some time acquiring financial literacy so that your budget will work for you one day instead of the other way around.
